President Barack Obama's top adviser suggested to The Huffington Post late Wednesday that the administration is ready to accept an across-the-board, temporary continuation of steep Bush-era tax cuts, including those for the wealthiest taxpayers.
The infamous Bush tax cuts, what are they exactly? Below are the tax rates for 2010.
|Marginal Tax Rate||Single||Married Filing Jointly or Qualified Widow(er)||Married Filing Separately||Head of Household|
|10%||$0 – $8,375||$0 – $16,750||$0 – $8,375||$0 – $11,950|
|15%||$8,376 – $34,000||$16,751 – $68,000||$8,376 – $34,000||$11,951 – $45,550|
|25%||$34,001 – $82,400||$68,001 – $137,300||$34,001 – $68,650||$45,551 – $117,650|
|28%||$82,401 – $171,850||$137,301 – $209,250||$68,651 – $104,625||$117,651 – $190,550|
|33%||$171,851 – $373,650||$209,251 – $373,650||$104,626 – $186,825||$190,551 - $373,650|
These were the income tax bracket changes with the Bush tax cuts:
- new 10% bracket, single filers < $6,000, joint filers < $12,000, heads of households < $10,000
- 15% bracket -> 10% bracket
- 28% bracket -> 25%
- 31% bracket -> 28%
- 36% bracket -> 33%
- 39.7% bracket -> 35%
Then the capital gains tax for 5 years from 10% to 8% and the top capital gains went from 20% to 15%. There are a host of others but these are the ones most talked about. The Obama administration's plan is to roll back income taxes to 39.7% for not only the current 35% but also some in the 33% tax bracket (those earning $200,000 or more). It's unclear if they plan on rolling back capital gains, which is where most of the uber rich, especially hedge funds, are not paying taxes. The Associated Press has a summary on the bush tax cuts if all are left to expire.
Mark Zandi of Moody's did a deficit cost analysis if all of the tax cuts were extended, summarized in the table below:
There is a lot of research around GDP multipliers and tax cuts. We have on one hand claims that tax cuts generate GDP, economic growth, on the other, tax cuts increase the deficit and in terms of jobs, these tax cuts didn't do much.
Do tax cuts pay for themselves? Do tax cuts create jobs? If so, what kind of tax cuts? For all of the rhetoric it seems few realize about 36% of the Stimulus was tax cuts. From the BEA, there were $120.1 billion each quarter in personal tax cuts from the Stimulus.
A huge part of the problem is how all the tax cuts are lumped together. Take this as an example, Deutsche Bank claims if the Bush tax cuts expire, the recovery will die. Ooooh, scary. Which tax cuts? The top, the middle, the bottom? What about the Stimulus tax cuts?
This is hugely political on the real effect on jobs and the reason is (obviously) GDP multipliers haven't been holding so great by the statistics versus the theory. From the Stimulus, the GDP multiplier for a tax cut to the rich was 0.1. The CBO reported the Stimulus (ARRA) kept the unemployment rate 0.7 to 1.7 percentage points lower and added between 1.7% and 4.5% GDP. So, if this is true, assuredly those results are not from tax cuts to the rich? How do we accurately estimate? Well, if the jobs created during the Bush administration are any measure, it appears other economic factors override the claim tax cuts are correlated to job growth. One thing is certain, tax cuts are correlated to deficits and debt.
Right now we have op-eds claiming tax cuts for the rich are Stimulus, while others are saying take that savings and turn it into real investments via the private sector. Now that is the problem with the original Stimulus, it wasn't directed enough into specific agendas, such as requiring companies hire Americans, invest in America or that Green jobs funds had to be only used in the United States. (as examples).
The PEW Economic Policy Group also analyzed the tax cuts and it's affects on the deficit and debt. Here is their graph of their results. Note, one thing many are forgetting is a way out of debt is to grow your way out of it and that's increasing jobs and GDP.
As Paul Krugman notes, the deficit commission has the agenda to give more taxes to the rich and cut social safety nets:
So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?
Actually, though, what the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.
It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans. And what does any of this have to do with deficit reduction?
If you are a deficit hawk, the New York Times put up a great interactive reduce the deficit game. You can choose which policies and programs to cut and see how it affects the deficits. Check out the tax cuts and the effects it has. I balanced the budget in 2 minutes without laying a finger on Social security or Medicare/Medicaid. Give it a whirl!